Imperial Sugar: The Best Defense Is a Good Offense

Imperial Sugar (IPSU) has been under attack lately, as the Occupational Safety and Health Administration [OSHA] has levied a $8.7 million fine for safety violations leading up to last February's explosion at its Port Wentworth refinery. A Senate Subcommittee has reviewed testimony from IPSU's Vice President, Graham H. Graham, detailing the plant's condition prior to the explosion. On top of that, the onslaught includes dismal third quarter results.

OSHA findings: IPSU CEO John Sheptor's response to OSHA's citations was strong: 

"Based on the review of OSHA's allegations, we have filed with OSHA, a "notice of contest" of the citations in which we challenge the allegations of the citations, the characteristics of the violations, and the penalties proposed. In short, we do not believe the facts merit the allegations made."

Third quarter results: Sales fell 51% from $216 million to $107 million. This was due to lower sugar prices and the subsequent shutdown of the Port Wentworth plant. The company lost $12.5 million, or $1.07 per share (this includes a $5.2 million impairment charge for the fire). SG&A costs dropped $800,000 to $11 million, but nearly doubled as a percentage of sales from 5.4% to 10.3%.

Going on the offensive: IPSU is exploring the feasibility of building an ethanol plant next to its Louisiana refinery that could produce up to 100 million gallons of ethanol per year. The plant would utilize 80% corn and 20% low grade sugar in the production process. The company has been lobbying the Federal Government extensively in hopes of achieving government incentives for hybrid corn-sugar ethanol production.

The Wholesome Sweetener acquisition: The company purchased an additional $4 million, or 5%, of the largest natural organic sugar producer (crunchy texture) in the US, and now owns a 50% stake. IPSU has acquired an option to purchase the remaining 50% after 9/1/2010. Wholesome's market value is approximating $80 million.

Plant rebuilding developments: Principal construction contracts are to be signed within the next 30-60 days and IPSU remains on schedule to begin bulk sugar production later this year and total restoration of its packaging capabilities by mid-summer 2009. The company expects insurance proceeds of up to $230 million to be utilized to complete its new "state of the art" facility.

The balance sheet: The shares currently trade below book value of $14.38. This metric is comprised of over $7 cash per share and no debt. IPSU's pristine liquidity position enables them to persevere and prosper over the long term despite current difficulties.

The bottom line: The stock's recent sell-off provides a nice opportunity to accumulate additional shares at a reasonable price. The company is taking an offensive approach by engaging "proactive" measures such as: evaluating the concept of producing ethanol, purchasing an organic sugar enterprise, a joint venture with a Mexican company and modernizing its refineries. Low sugar prices, OSHA citations, Senate testimonials and the disaster at Port Wentworth will eventually fade into the distant past, and in the meantime, IPSU will get whole again.

Disclosure: Long IPSU

Comments

[keithpiccir...:]

If they took a larger position with sugar biofuels this company could shed its anemic growth record. Congress will have to come up with some monies although they sure threw a bunch at the financials and may keep adding to their coffers. A revamped renewable energy bill with incentives sure would help, but nuclear McCain or solar Obama will get the lions share. CZZ probably a sweeter stock.

2008 Aug 06 10:44 PM

[Socialism c...:]

Um...isn't the sugar tariff still problematic? Meanwhile...the bloom is off ethanol once drill, drill, drill takes effect. If Congress refuses to act on that, they are facing the wrath of the people...that much has been made clear recently. I don't see much changing with the sugar market or IPSU's fortunes reversing unless the tariff is somehow completely revoked. That will happen over the dead bodies of sugar beet farmers.

2008 Aug 07 05:57 PM

[Jakester:]

With Lehman needing cash, they may be forced to sell their IPSU position. If they can't find a buyer to take them out of the position and are forced to sell into the market, look out below!

2008 Aug 18 02:18 PM

[Urbane Gori...:]

Boy Jakester! You sure called IPSA and Lehman, didn't you!! jegan

2008 Sep 15 03:59 PM